In April 2019, the Company signed an unsecured promissory note for $500 at a rate of 10% with Paul Swanson. The outstanding principal balance together with all accrued and unpaid interest is due in July 2019.
The Company continues to monitor market conditions overall and in the specific markets in which it lends. Most non-bank competitors are no longer making new loans and some are not funding existing loans. Some markets have had little to no impact from a housing perspective as a result of COVID-19, while other markets have been impacted. Borrowers in Pennsylvania and Michigan have been most impacted by COVID-19 due to the government shutting down home construction completely in those states (Pennsylvania has announced reopening construction on May 1, 2020). Opportunities for home sales for our borrowers in their markets are impacted to varying degrees. The Company is now funding new loans to borrowers in stronger markets for the purpose of developing presold homes, which loans have reduced (60%) loan-to-value ratios. The Company is also considering funding spec loans in those same markets on a case-by-case basis for loans with reduced loan-to-value ratios (50-60%).
Changes in home buyer FICO scores and other requirements by end user lenders is expected to impact the Company’s builders who focus on lower priced homes, and some real estate markets where the primary business is entertainment will be more impacted than most other markets. The Company has some customers in Orlando, Florida, and is working through issues with two of those customers. Some of those customers may have their credit quality downgraded in future quarters, and the Company is working to mitigate any losses it may incur as a result of the virus for those customers and others as they become known.
As of April 20, 2020, the Company informed some of those builders located in stronger markets to begin construction. As a result, the committed amount on the remaining loans that the Company has not released for construction to begin was $4,200 with $3,000 unfunded.
On May 7, 2020, the Company made the decision to reopen lending under normal, pre-COVID-19 terms for a limited group of certain of its customers. In addition, the decision was made to allow rehab loans to builders at terms that are less conservative than the 50% loan to value established in April 2020 but more conservative than terms prior to the arrival of COVID-19.
Management is also contemplating purchasing debt from other similar lending companies at deep discounts, but does not have any serious prospects at this time.
On May 5, 2020, we entered into an agreement to borrow approximately $362 pursuant to the Paycheck Protection Program (“PPP”), created under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The PPP is intended to provide loans to qualified businesses to cover payroll and certain other identified costs. The loan has an interest rate of 1.0% and a term of 24 months. No payments are due for the first 6 months, although interest accrues, and monthly payments, which include interest, are due over the next 18 months to pay off the loan. Funds from the loan may only be used for certain purposes, including payroll, benefits, rent, and utilities. All or a portion of the loan may be forgivable, as provided by the terms of the PPP. The loan is evidenced by a promissory note, which contains customary events of default relating to, among other things, payment defaults and breaches of representations. We may prepay the loan at any time prior to maturity with no prepayment penalties.
The Company is continuously monitoring the markets, builders, and the COVID-19 situation for the remaining loans which the Company has not yet released for construction. Management anticipates revisiting these lending parameters in May 2020 as the COVID-19 situation continues to develop. Management also notes that while demand for its lending products declined in 2019 due increases in competition, demand during the pandemic is increasing.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All dollar [$] amounts shown in thousands.)
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim condensed consolidated financial statements and the notes thereto contained elsewhere in this report. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should also be read in conjunction with our audited annual consolidated financial statements and related notes and other consolidated financial data (the “2018“2019 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 (the “2018“2019 Form 10-K”). See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.
Overview
The Company faces risks related to COVID-19, which has caused significant disruptions to the economy. COVID-19 has spread globally and the outbreak has caused significant disruptions to the economy, including in the United States and in all of the markets in which the Company lends. The Company’s operating results depend significantly on the homebuilding industry.
During March 2020, the Company made the decision due to the potential impact of COVID-19 to inform its borrowers that the Company would fund all loans where the underlying asset was currently under construction. For borrowers who currently have loans where the underlying asset was at a non-start position, they were informed to not start construction until told to do so by the Company.
During April 2020, as the Company continued to monitor market conditions overall and in the specific markets in which the Company lends, the Company observed that some markets had little to no impact from a housing perspective as a result of COVID-19; however, the Company’s borrowers in Pennsylvania and Michigan were significantly impacted due to the government shutting down home construction completely. The Company made the decision to fund new loans to borrowers in stronger markets for the purpose of developing presold homes, which loans have reduced loan-to-value ratios. In addition, the Company will continue to monitor funding spec loans in some markets on a case-by-case basis for loans with reduced loan -to-value ratios.
On May 7, 2020, the Company made the decision to reopen lending under normal, pre-COVID-19 terms for a limited group of certain of its customers. In addition, the decision was made to allow rehab loans to builders at terms that are less conservative than the 50% loan to value established in April 2020 but more conservative than terms prior to the arrival of COVID-19.
Net income for the first quarter of 2019 increased2020 decreased by $65$270 when compared to the same period of 2018.2019. The increasedecrease in net income was mainlyprimarily due to an increase in net interest income of $280, partially offset by increases in loan loss reserve and impairment of $82 and selling, general and administrative (“SG&A”) expenses of $127. As of March 31, 2019, we had a total of 19 employees compared to 17 at March 31, 2018.the following:
● | Fee income decreased $236 or 33% to $484 compared to the same period of 2019. Originations for the quarter ended March 31, 2020 were $7,771 compared to $18,982 for the same period of 2019; The decrease in originations was primarily due to competition and COVID-19. | |
● | Loss on the sale and impairment of foreclosed assets increased $64 due to one certain asset being sold and additional costs incurred to complete construction of additional properties. |
We had $49,991$54,197 and $46,490$55,369 in loan assets as of March 31, 20192020 and December 31, 2018,2019, respectively. In addition, as of March 31, 2019,2020, we had 289218 construction loans in 21 states with 7567 borrowers and sevennine development loans in threefour states with threefive borrowers.
Cash provided byused in operations increased $1,088decreased $1,019 for three months ended March 31, 20192020 as compared to the same period of 2018.2019. Our increasedecrease in operating cash flow was due primarily to highera decrease in interest escrow of $349, net income of $270 and change in loan originations.origination fees, net of $250.
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Loan originations increased by $3,024 or 19% to $18,981 for the quarter ended March 31, 2019 compared to the same period of 2018.
Critical Accounting Estimates
To assist in evaluating our interim condensed consolidated financial statements, we describe below the critical accounting estimates that we use. We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used, would have a material impact on our consolidated financial condition or results of operations. See our 20182019 Form 10-K, as filed with the SEC, for more information on our critical accounting estimates. No material changes to our critical accounting estimates have occurred since December 31, 20182019 unless listed below.
Loan Losses
Fair value of collateral has the potential to impact the calculation of the loan loss provision (the amount we have expensed over time in anticipation of loan losses we have not yet realized). Specifically, relevant to the allowance for loan loss reserve is the fair value of the underlying collateral supporting the outstanding loan balances. Fair value measurements are an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Due to a rapidly changing economic market, an erratic housing market, the various methods that could be used to develop fair value estimates, and the various assumptions that could be used, determining the collateral’s fair value requires significant judgment.
| March 31, 2019 | March 31, 2020 | |||||||
| Loan Loss | Loan Loss | |||||||
| Provision | Provision | |||||||
| Change in Fair Value Assumption | Higher/(Lower) | Higher/(Lower) | ||||||
| Increasing fair value of the real estate collateral by 35%* | $ | - | $ | - | ||||
| Decreasing fair value of the real estate collateral by 35%** | $ | (1,881 | ) | $ | (6,528 | ) | ||
* Increases in the fair value of the real estate collateral do not impact the loan loss provision, as the value generally is not “written up.”
** Assumes the loans were nonperforming and a book amount of the loans outstanding of $49,991.$54,197.
Foreclosed Assets
The fair value of real estate will impact our foreclosed asset value, which is recorded at 100% of fair value (after selling costs are deducted).
| March 31, 2019 | March 31, 2020 | |||||||
| Foreclosed | Foreclosed | |||||||
| Assets | Assets | |||||||
| Change in Fair Value Assumption | Higher/(Lower) | Higher/(Lower) | ||||||
| Increasing fair value of the foreclosed asset by 35%* | $ | - | $ | - | ||||
| Decreasing fair value of the foreclosed asset by 35%** | $ | (2,124 | ) | $ | (1,761 | ) | ||
* Increases in the fair value of the foreclosed assets do not impact the carrying value, as the value generally is not “written up.” Those gains would be recognized at the sale of the asset.
** Assumes a book amount of the foreclosed assets of $6,069.$5,031.
Consolidated Results of Operations
Key financial and operating data for the three months ended March 31, 2019 and 2018 are set forth below. For a more complete understanding of our industry, the drivers of our business, and our current period results, this discussion should be read in conjunction with our interim condensed consolidated financial statements, including the related notes and the other information contained in this document.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2019 | 2018 | |||||||
| Interest Income | ||||||||
| Interest and fee income on loans | $ | 2,432 | $ | 1,707 | ||||
| Interest expense: | ||||||||
| Interest related to secured borrowings | 681 | 411 | ||||||
| Interest related to unsecured borrowings | 625 | 450 | ||||||
| Interest expense | 1,306 | 861 | ||||||
| Net interest income | 1,126 | 846 | ||||||
| Less: Loan loss provision | 47 | 40 | ||||||
| Net interest income after loan loss provision | 1,079 | 806 | ||||||
| Non-Interest Income | ||||||||
| Gain from foreclosure of assets | - | - | ||||||
| Total non-interest income | - | - | ||||||
| Income | 1,079 | 806 | ||||||
| Non-Interest Expense | ||||||||
| Selling, general and administrative | 624 | 497 | ||||||
| Depreciation and amortization | 23 | 17 | ||||||
| Impairment loss on foreclosed assets | 80 | 5 | ||||||
| Total non-interest expense | 727 | 519 | ||||||
| Net Income | $ | 352 | $ | 287 | ||||
| Earned distribution to preferred equity holders | 105 | 63 | ||||||
| Net income attributable to common equity holders | $ | 247 | $ | 224 | ||||
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Interest Spread
The following table displays a comparison of our interest income, expense, fees, and spread:
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Interest Income | * | * | * | * | ||||||||||||||||||||||||||||
| Interest income on loans | $ | 1,712 | 13 | % | $ | 1,291 | 14 | % | $ | 2,090 | 14 | % | $ | 1,712 | 13 | % | ||||||||||||||||
| Fee income on loans | 720 | 6 | % | 416 | 4 | % | 484 | 4 | % | 720 | 6 | % | ||||||||||||||||||||
| Interest and fee income on loans | 2,432 | 19 | % | 1,707 | 18 | % | 2,574 | 18 | % | 2,432 | 19 | % | ||||||||||||||||||||
| Interest expense unsecured | 585 | 5 | % | 402 | 4 | % | 727 | 5 | % | 585 | 5 | % | ||||||||||||||||||||
| Interest expense secured | 681 | 5 | % | 411 | 4 | % | 817 | 6 | % | 681 | 5 | % | ||||||||||||||||||||
| Amortization of offering costs | 40 | - | 48 | 1 | % | 40 | - | % | 40 | - | % | |||||||||||||||||||||
| Interest expense | 1,306 | 10 | % | 861 | 9 | % | 1,584 | 11 | % | 1,306 | 10 | % | ||||||||||||||||||||
| Net interest income (spread) | $ | 1,126 | 9 | % | $ | 846 | 9 | % | $ | 990 | 7 | % | $ | 1,126 | 9 | % | ||||||||||||||||
| Weighted average outstanding loan asset balance | $ | 50,886 | $ | 37,831 | $ | 57,756 | $ | 50,886 | ||||||||||||||||||||||||
*annualized amount as percentage of weighted average outstanding gross loan balance
There are three main components that can impact our interest spread:
●Difference between the interest rate received (on our loan assets) and the interest rate paid (on our borrowings). The loans we have originated have interest rates which are based on our cost of funds, with a minimum cost of funds of 7%. For most loans, the margin is fixed at 3%; however, for our development loans the margin is fixed at 7%. Loans originated after June 30, 2018 are at an increase of 1% to approximately 3% margin, older loans are at a 2% margin. This component is also impacted by the lending of money with no interest cost (our equity).
ForInterest income on loans increased 1% for the periodquarter ended March 31, 2019, the interest income on loans decreased by 1%2020 compared to the prior year’s same period of 2019 due primarily to foreclosed assets which we now own (and which are not paying interest) were performingour cost of funds. During the quarter ended March 31, 2020 and 2019, our cost of funds was 10.69% and 10.45%, respectively. In addition, loans in the same period last year.receivables, net increased $4,206 to $54,197 as of March 31, 2020 compared to $49,991 as of March 31, 2019. The difference between the interest rate received on our loans and the interest we paid was 3%, as compared to 5%. The 3% for both the periods ended March 31, 2020 and 2019 which is lower due to the dollar amount of loans that are not paying interest. The 5% from last year was higher than typical because of the dollar amount of loans we had paying default rate interest. Some of those loans have since paid off, and some have become foreclosed assets. While our stated margin is 3%, our actual is different because 1) some loans pay higher than the stated margin, 2) some loans are not paying interest, and 3) the dollar amount of loans may be different than the dollar amount of debt. Another factor that impacts this margin is the percentage of loans which are development loans paying the 7%standard margin.
We currently anticipate that the difference between our interest income and interest expense will continue to be 3% for the remainder of 2019. With the increase in2020, however our pricing which started with loans created in the third quartermargin could be compressed as a result of 2018, weCOVID-19. We anticipate our standard margin to be 3% on all future construction loans and 7% on all development loans which yields a blended margin of approximately 3.4%. These factors should yield us a spread in the low 3%’s until the foreclosed asset balance is reduced significantly, and then in the low 4%’s thereafter, assuming no other significant changes to our business. Our largest foreclosed asset, a property in Sarasota, Florida, is completed and on the market.
●Fee income. Our construction loans have aloan fee is 5% fee on the amount that we commit to lend, which is amortized over the expected life of each of those loans; however, weloans. In addition, our development loans do not recognize a loan fee on our development loans.fee. When loans terminate quickerbefore than their expected life, the remaining unrecognized fee is recognized uponat the termination of the loan. OurDuring the quarter ended March 31, 2019, our fee income increased due toincluded a modification fee chargedcharge to our largest customer of $125, and an increase in our loan turns.
We currently anticipate that$125. Excluding the modification charge, fee income will be 5%on loans for the remainderquarter ended March 31, 2019 was 5%. During the first quarter of 2019.2020, our lower origination of new loans (partly due to competition and partly due to the COVID-19) caused the reduction to 4% for fee income in that quarter. Higher originations or a reduction in the balance of old loans will result in the fee income returning to 5%.
●Amount of nonperforming assets. Generally, we can have two types of nonperforming assets that negatively affect interest spread: loans not paying interest and foreclosed assets.
As of March 31, 2020 and 2019, $1,581 and 2018, $2,617 and $3,776, respectively, of loans were not paying interest. Slightly more thaninterest, respectively. As of late April 2020, and directly related to COVID-19, one of our customers in default located in Orlando, Florida entered into negotiations to sell half of his loans to another of our customers. We are working with the 2019 amount is duecustomer with respect to the deathremainder of his loans either through a customer.deed in lieu of foreclosure or a foreclosure.
Foreclosed assets do not provide a monthly interest return. As of March 31, 20192020 and 2018, we had $6,069 and $1,079, respectively, in2019, foreclosed assets were $5,031 and $6,069, respectively, which resulted in a negative impact on our interest spread.spread in both years.
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The amount of nonperforming assets is expected to increase over the next quarter due to some of the nonperforming loans becoming foreclosed assets, and will decrease as we continue to sell some of those properties.our assets where construction is complete.
SG&A Expenses
The following table displays our SG&A expenses:
For the Three Months Ended March 31, | For the Three Months Ended March 31, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Legal and accounting | $ | 127 | $ | 143 | $ | 139 | $ | 127 | ||||||||
| Salaries and related expenses | 362 | 236 | 278 | 362 | ||||||||||||
| Board related expenses | 16 | 22 | 25 | 16 | ||||||||||||
| Advertising | 19 | 17 | 21 | 19 | ||||||||||||
| Rent and utilities | 9 | 10 | 13 | 9 | ||||||||||||
| Loan and foreclosed asset expenses | 20 | 8 | 135 | 20 | ||||||||||||
| Travel | 32 | 23 | 59 | 32 | ||||||||||||
| Other | 39 | 38 | 38 | 39 | ||||||||||||
| Total SG&A | $ | 624 | $ | 497 | $ | 708 | $ | 624 | ||||||||
Our SG&A expense increased $127$84 for the quarter ended March 31, 2020 compared to the same period of 2019 due significantly to the following:
| ● | ||
| Loan and foreclosed asset expenses increased $115 due to | ||
| ● | Legal and | |
| ● | Board related expenses increased $9 due to the addition of one board member in April 2019; | |
| ● | Travel increased $27 due to timing of field travel; and | |
| ● | These items were |
Impairment Loss on Foreclosed Assets
We owned six and four foreclosed assets asAs of March 31, 2020 and 2019, and 2018, respectively. Three of theimpaired loss on foreclosed assets are lots under construction, one iswas $109 and $80, respectively. The increase in foreclosed assets was directly related to properties acquired back due to the death of a completed home,borrower in 2018. During the quarter ended March 31, 2019, we finished our largest foreclosed asset in Sarasota, Florida and two are land lots. recorded an impairment of $80 during the quarter on that property.
We do not anticipate losses on the sale of foreclosed assets in the future; however, this may be subject to change based on the final selling price of the foreclosed assets. We finished our largest foreclosed asset in Sarasota, Florida and recorded an impairment of $80 during the quarter on that property.
Loan Loss Provision
Our loan loss provision increased by $7decreased $12 for the quarter ended March 31, 2019,2020, compared to the same periodperiods of 2018. In both quarters we increased our2019. The decrease in loan loss percentage on the collective reserve, and the increase of $7provision was primarily due to the largerreduction in loan balancesloss provision for our collective reserve of $46, which was offset by an increase in 2019 as comparedloans with a specific reserve of $34. The increase in our specific researve related to 2018.additional impairment on two of our assets.
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Consolidated Financial Position
Loans Receivable
Commercial Loans – Construction Loan Portfolio Summary
We anticipate that the aggregate balance of our construction loan portfolio will increase as loans near maturity and as we have new loan originations.
The following is a summary of our loan portfolio to builders for home construction loans as of March 31, 2019:2020:
| State | Number of | Number of | Value of Collateral(1) | Commitment Amount | Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | Number of | Number of | Value of Collateral(1) | Commitment Amount | Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | ||||||||||||||||||||||||||||||||||||||||||
| Arizona | 1 | 3 | $ | 1,830 | $ | 1,167 | $ | 393 | 64 | % | 5 | % | 1 | 1 | $ | 1,345 | $ | 807 | $ | 269 | 60 | % | 5 | % | ||||||||||||||||||||||||||||||||
| Connecticut | 1 | 1 | 340 | 204 | 44 | 60 | % | 5 | % | 1 | 2 | 683 | 450 | 179 | 66 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Colorado | 2 | 4 | 2,549 | 1,739 | 1,576 | 68 | % | 5 | % | 1 | 1 | 630 | 425 | 425 | 67 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Florida | 16 | 119 | 33,500 | 24,195 | 12,935 | 72 | % | 5 | % | 16 | 107 | 32,293 | 24,079 | 18,847 | 75 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Georgia | 6 | 9 | 7,233 | 4,749 | 3,770 | 66 | % | 5 | % | 3 | 4 | 2,085 | 1,343 | 942 | 64 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Idaho | 1 | 2 | 605 | 423 | 121 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Illinois | 1 | 1 | 1,245 | 747 | 367 | 60 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Indiana | 1 | 2 | 717 | 502 | 312 | 70 | % | 5 | % | 2 | 3 | 1,687 | 1,083 | 554 | 64 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Michigan | 4 | 30 | 7,119 | 4,863 | 2,787 | 68 | % | 5 | % | 4 | 6 | 2,145 | 1,480 | 1,298 | 69 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| New Jersey | 5 | 14 | 4,728 | 3,591 | 2,881 | 76 | % | 5 | % | 3 | 5 | 1,676 | 1,255 | 1,245 | 74 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| New York | 2 | 3 | 1,175 | 823 | 586 | 70 | % | 5 | % | 2 | 4 | 1,740 | 1,199 | 979 | 69 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| North Carolina | 4 | 14 | 3,685 | 2,538 | 1,365 | 69 | % | 5 | % | 5 | 14 | 3,875 | 2,691 | 1,506 | 69 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| North Dakota | 1 | 1 | 375 | 263 | 242 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Ohio | 3 | 6 | 4,787 | 3,057 | 1,937 | 64 | % | 5 | % | 3 | 8 | 3,463 | 2,206 | 1,814 | 64 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Oregon | 1 | 3 | 1,704 | 1,193 | 354 | 70 | % | 5 | % | 2 | 4 | 1,887 | 1,252 | 798 | 66 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Pennsylvania | 3 | 33 | 25,543 | 14,900 | 10,960 | 58 | % | 5 | % | 3 | 20 | 17,129 | 11,557 | 10,403 | 67 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| South Carolina | 13 | 25 | 9,027 | 6,296 | 3,739 | 70 | % | 5 | % | 8 | 20 | 6,583 | 4,907 | 2,734 | 75 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Tennessee | 2 | 3 | 1,120 | 784 | 381 | 70 | % | 5 | % | 3 | 4 | 1,367 | 1,069 | 547 | 78 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Texas | 2 | 3 | 535 | 374 | 143 | 70 | % | 5 | % | 4 | 6 | 3,009 | 1,987 | 946 | 66 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Utah | 3 | 7 | 3,072 | 2,105 | 1,141 | 69 | % | 5 | % | 2 | 4 | 2,307 | 1,701 | 1,210 | 74 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Virginia | 2 | 6 | 2,104 | 1,417 | 953 | 67 | % | 5 | % | 1 | 2 | 820 | 535 | 520 | 65 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Wyoming | 1 | 1 | 228 | 160 | 42 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Washington | 1 | 1 | 450 | 315 | 293 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Wisconsin | 1 | 1 | 539 | 332 | 285 | 62 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 75 | 289 | $ | 111,976 | $ | 75,343 | $ | 46,662 | 67 | %(3) | 5 | % | 67 | 218 | $ | 86,958 | $ | 61,420 | $ | 46,161 | 71 | %(3) | 5 | % | ||||||||||||||||||||||||||||||||
| (1) | The value is determined by the appraised value. | |
| (2) | The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value. | |
| (3) | Represents the weighted average loan to value ratio of the loans. |
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The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2018:2019:
| State | Number of | Number of | Value of Collateral(1) | Commitment Amount | Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | Number of | Number of | Value of Collateral(1) | Commitment Amount | Gross Amount | Loan to Ratio(2) | Loan Fee | ||||||||||||||||||||||||||||||||||||||||||
| Arizona | 1 | 1 | $ | 1,140 | $ | 684 | $ | 214 | 60 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Colorado | 2 | 4 | 2,549 | 1,739 | 1,433 | 68 | % | 5 | % | 1 | 1 | $ | 630 | $ | 425 | $ | 424 | 67 | % | 5 | % | |||||||||||||||||||||||||||||||||||
| Connecticut | 1 | 1 | 340 | 224 | 55 | 66 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Florida | 18 | 104 | 32,381 | 22,855 | 12,430 | 71 | % | 5 | % | 17 | 112 | 32,259 | 24,031 | 16,826 | 74 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Georgia | 5 | 6 | 5,868 | 3,744 | 2,861 | 64 | % | 5 | % | 3 | 4 | 2,085 | 1,343 | 917 | 64 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Idaho | 1 | 2 | 605 | 424 | 77 | 70 | % | 5 | % | 1 | 1 | 310 | 217 | 173 | 70 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Indiana | 2 | 5 | 1,567 | 1,097 | 790 | 70 | % | 5 | % | 2 | 3 | 1,687 | 1,083 | 383 | 64 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Michigan | 4 | 26 | 5,899 | 3,981 | 2,495 | 67 | % | 5 | % | 4 | 11 | 3,696 | 2,566 | 1,820 | 69 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| New Jersey | 5 | 15 | 4,999 | 3,742 | 2,820 | 75 | % | 5 | % | 3 | 6 | 1,925 | 1,471 | 1,396 | 76 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| New York | 2 | 4 | 1,555 | 1,089 | 738 | 70 | % | 5 | % | 2 | 3 | 1,370 | 940 | 743 | 69 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| North Carolina | 5 | 12 | 3,748 | 2,580 | 1,712 | 69 | % | 5 | % | 6 | 20 | 5,790 | 4,009 | 2,471 | 69 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| North Dakota | 1 | 1 | 375 | 263 | 227 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Ohio | 2 | 3 | 3,220 | 1,960 | 1,543 | 61 | % | 5 | % | 3 | 9 | 4,117 | 2,664 | 2,153 | 65 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Oregon | 1 | 2 | 1,137 | 796 | 739 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Pennsylvania | 3 | 34 | 24,808 | 14,441 | 10,087 | 58 | % | 5 | % | 3 | 24 | 20,791 | 13,322 | 11,772 | 64 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| South Carolina | 15 | 29 | 9,702 | 6,738 | 4,015 | 69 | % | 5 | % | 11 | 25 | 8,809 | 6,419 | 4,786 | 73 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Tennessee | 1 | 2 | 750 | 525 | 347 | 70 | % | 5 | % | 3 | 4 | 1,367 | 1,069 | 503 | 78 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Texas | 1 | 1 | 179 | 125 | 26 | 70 | % | 5 | % | 3 | 4 | 1,984 | 1,270 | 843 | 64 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Utah | 4 | 4 | 1,788 | 1,206 | 486 | 67 | % | 5 | % | 2 | 4 | 1,862 | 1,389 | 1,000 | 75 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Virginia | 3 | 6 | 1,675 | 1,172 | 806 | 70 | % | 5 | % | 1 | 3 | 1,245 | 815 | 734 | 65 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Washington | 1 | 2 | 1,040 | 728 | 445 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Wisconsin | 1 | 1 | 539 | 332 | 285 | 62 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Wyoming | 1 | 1 | 228 | 160 | 143 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 75 | 259 | $ | 102,808 | $ | 68,365 | $ | 43,107 | 67 | %(3) | 5 | % | 70 | 241 | $ | 93,211 | $ | 65,273 | $ | 48,611 | 70 | %(3) | 5 | % | ||||||||||||||||||||||||||||||||
| (1) | The value is determined by the appraised value. | |
| (2) | The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value. | |
| (3) | Represents the weighted average loan to value ratio of the loans. |
Commercial Loans – Real Estate Development Loan Portfolio Summary
The following is a summary of our loan portfolio to builders for land development as of March 31, 2019 and December 31, 2018. A significant portion of our development loans consist of three development loans to a borrower in Pittsburgh, Pennsylvania (the “Pennsylvania Loans”). Our additional development loans are with borrowers in South Carolina and Florida.2020:
| Year | Number of States | Number of Borrowers | Number of | Gross Value of Collateral(1) | Commitment Amount(3) | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | ||||||||||||||||||||||||
| 2019 | 3 | 3 | 7 | $ | 11,564 | $ | 8,010 | $ | 6,269 | 54 | % | $ | 1,000 | |||||||||||||||||||
| 2018 | 3 | 4 | 9 | 10,134 | 7,456 | 6,020 | 59 | % | 1,000 | |||||||||||||||||||||||
| States | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount(2) | Gross Amount Outstanding | Loan to Value Ratio(3) | Interest Spread | |||||||||||||||||||||
| Pennsylvania | 1 | 3 | $ | 9,335 | $ | 8,200 | $ | 8,384 | 90 | % | 7 | % | ||||||||||||||||
| Florida | 2 | 3 | 1,301 | 1,356 | 783 | 60 | % | 7 | ||||||||||||||||||||
| North Carolina | 1 | 1 | 400 | 260 | 131 | 33 | % | 7 | ||||||||||||||||||||
| South Carolina | 1 | 2 | 1,115 | 1,250 | 618 | 55 | % | 7 | ||||||||||||||||||||
| Total | 5 | 9 | $ | 12,151 | $ | 11,066 | $ | 9,916 | 82 | %(4) | 7 | % | ||||||||||||||||
| (1) | The value is determined by the appraised value adjusted for remaining costs to be |
| (2) | The commitment amount does not include unfunded letters of credit. |
| (3) | The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above. |
| (4) | Represents the weighted average loan to value ratio of the loans. |
| 24 |
The following is a summary of our loan portfolio to builders for land development as of December 31, 2019:
| States | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount(2) | Gross Amount Outstanding | Loan to Value Ratio(3) | Interest Spread | |||||||||||||||||||||
| Pennsylvania | 1 | 3 | $ | 10,191 | $ | 7,000 | $ | 7,389 | 73 | % | 7 | % | ||||||||||||||||
| Florida | 2 | 3 | 1,301 | 1,356 | 891 | 68 | % | 7 | ||||||||||||||||||||
| North Carolina | 1 | 1 | 400 | 260 | 99 | 25 | % | 7 | ||||||||||||||||||||
| South Carolina | 1 | 2 | 1,115 | 1,250 | 618 | 55 | % | 7 | ||||||||||||||||||||
| Total | 5 | 9 | $ | 13,007 | $ | 9,866 | $ | 8,997 | 69 | %(4) | 7 | % | ||||||||||||||||
| (1) | The value is determined by the appraised value adjusted for remaining costs to be paid and third-party mortgage balances. Part of this collateral is $1,470 of preferred equity in our Company. In the event of a foreclosure on the property securing these loans, the portion of our collateral that is preferred equity in our Company might be difficult to sell, which could impact our ability to eliminate the loan balance. |
| (2) | The commitment amount does not include unfunded letters of credit. |
| (3) | The |
| (4) | Represents the weighted average loan to value ratio of |
Combined Loan Portfolio Summary
Financing receivables are comprised of the following as of March 31, 20192020 and December 31, 2018:2019:
| March 31, 2019 | December 31, 2018 | |||||||
| Loans receivable, gross | $ | 52,931 | $ | 49,127 | ||||
| Less: Deferred loan fees | (1,303 | ) | (1,249 | ) | ||||
| Less: Deposits | (1,707 | ) | (1,510 | ) | ||||
| Plus: Deferred origination costs | 303 | 308 | ||||||
| Less: Allowance for loan losses | (233 | ) | (186 | ) | ||||
| Loans receivable, net | $ | 49,991 | $ | 46,490 | ||||
| March 31, 2020 | December 31, 2019 | |||||||
| Loans receivable, gross | $ | 56,077 | $ | 57,608 | ||||
| Less: Deferred loan fees | (676 | ) | (856 | ) | ||||
| Less: Deposits | (1,149 | ) | (1,352 | ) | ||||
| Plus: Deferred origination costs | 215 | 204 | ||||||
| Less: Allowance for loan losses | (270 | ) | (235 | ) | ||||
| Loans receivable, net | $ | 54,197 | $ | 55,369 | ||||
The following is a roll forward of combined loans:
Three Months Ended 2019 | Year Ended 2018 | Three Months Ended 2018 | Three Months Ended 2020 | Year Ended 2019 | Three Months Ended 2019 | |||||||||||||||||||
| Beginning balance | $ | 46,490 | $ | 30,043 | $ | 30,043 | $ | 55,369 | $ | 46,490 | $ | 46,490 | ||||||||||||
| Additions | 13,403 | 54,145 | 14,476 | 9,462 | 56,842 | 13,404 | ||||||||||||||||||
| Payoffs/sales | (9,600 | ) | (32,899 | ) | (4,649 | ) | ||||||||||||||||||
| Principal collections | (10,993 | ) | (45,009 | ) | (9,600 | ) | ||||||||||||||||||
| Transferred to foreclosed assets | – | (4,494 | ) | – | – | (3,352 | ) | – | ||||||||||||||||
| Change in deferred origination expense | (5 | ) | 199 | 23 | ||||||||||||||||||||
| Change in builder deposit | (197 | ) | (12 | ) | (76 | ) | 203 | 157 | (197 | ) | ||||||||||||||
| Change in loan loss provision | (47 | ) | (89 | ) | (40 | ) | (35 | ) | (49 | ) | (47 | ) | ||||||||||||
| New loan fees | (947 | ) | (2,949 | ) | (619 | ) | ||||||||||||||||||
| Earned loan fees | 894 | 2,546 | 534 | |||||||||||||||||||||
| Change in loan fees, net | 191 | 290 | (59 | ) | ||||||||||||||||||||
| Ending balance | $ | 49,991 | $ | 46,490 | $ | 39,692 | $ | 54,197 | $ | 55,369 | $ | 49,991 | ||||||||||||
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Finance Receivables – By risk rating:
| March 31, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
| Pass | $ | 47,941 | $ | 43,402 | $ | 50,809 | $ | 53,542 | ||||||||
| Special mention | 2,373 | 3,222 | 3,687 | 2,571 | ||||||||||||
| Classified – accruing | – | – | – | – | ||||||||||||
| Classified – nonaccrual | 2,617 | 2,503 | 1,581 | 1,495 | ||||||||||||
| Total | $ | 52,931 | $ | 49,127 | $ | 56,077 | $ | 57,608 | ||||||||
Finance Receivables – Method of impairment calculation:
| March 31, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
| Performing loans evaluated individually | $ | 20,882 | $ | 19,037 | $ | 27,732 | $ | 26,233 | ||||||||
| Performing loans evaluated collectively | 29,432 | 27,587 | 26,764 | 29,880 | ||||||||||||
| Non-performing loans without a specific reserve | 2,311 | 2,204 | 1,063 | 1,467 | ||||||||||||
| Non-performing loans with a specific reserve | 306 | 299 | 518 | 28 | ||||||||||||
| Total evaluated collectively for loan losses | $ | 52,931 | $ | 49,127 | $ | 56,077 | $ | 57,608 | ||||||||
At March 31, 20192020 and December 31, 2018,2019, there were no loans acquired with deteriorated credit quality.
Impaired Loans
The following is a summary of our impaired nonaccrual commercial construction loans as of March 31, 20192020 and December 31, 2018.2019.
| March 31, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
| Unpaid principal balance (contractual obligation from customer) | $ | 2,617 | $ | 2,503 | $ | 1,581 | $ | 1,495 | ||||||||
| Charge-offs and payments applied | - | - | - | - | ||||||||||||
| Gross value before related allowance | 2,617 | 2,503 | 1,581 | 1,495 | ||||||||||||
| Related allowance | (29 | ) | (20 | ) | (50 | ) | (8 | ) | ||||||||
| Value after allowance | $ | 2,588 | $ | 2,483 | $ | 1,531 | $ | 1,487 | ||||||||
Below is an aging schedule of loans receivable as of March 31, 2019,2020, on a recency basis:
| No. Loans | Unpaid Balances | % | No. Loans | Unpaid Balances | % | |||||||||||||||||||
| Current loans (current accounts and accounts on which more than 50% of an original contract payment was made in the last 59 days) | 273 | $ | 50,314 | 95 | % | 222 | $ | 54,496 | 97 | % | ||||||||||||||
| 60-89 days | 20 | 1,617 | 3 | % | 1 | 82 | - | % | ||||||||||||||||
| 90-179 days | – | – | – | % | - | - | - | % | ||||||||||||||||
| 180-269 days | 3 | 1,000 | 2 | % | 4 | 1,499 | 3 | % | ||||||||||||||||
| Subtotal | 296 | $ | 52,931 | 100 | % | 227 | $ | 56,077 | 100 | % | ||||||||||||||
| Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | – | % | - | $ | - | - | % | ||||||||||||||
| Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.) | – | $ | – | – | % | - | $ | - | - | % | ||||||||||||||
| Total | 296 | $ | 52,931 | 100 | % | 227 | $ | 56,077 | 100 | % | ||||||||||||||
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Below is an aging schedule of loans receivable as of March 31, 2019,2020, on a contractual basis:
| No. Loans | Unpaid Balances | % | No. Loans | Unpaid Balances | % | |||||||||||||||||||
| Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date. | 273 | $ | 50,314 | 95 | % | 222 | $ | 54,496 | 97 | % | ||||||||||||||
| 60-89 days | 20 | 1,617 | 3 | % | 1 | 82 | - | % | ||||||||||||||||
| 90-179 days | – | – | – | % | - | - | - | % | ||||||||||||||||
| 180-269 days | 3 | 1,000 | 2 | % | 4 | 1,499 | 3 | % | ||||||||||||||||
| Subtotal | 296 | $ | 52,931 | 100 | % | 227 | $ | 56,077 | 100 | % | ||||||||||||||
| Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | – | % | - | $ | - | - | % | ||||||||||||||
| Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.) | – | $ | – | – | % | - | $ | - | - | % | ||||||||||||||
| Total | 296 | $ | 52,931 | 100 | % | 227 | $ | 56,077 | 100 | % | ||||||||||||||
Below is an aging schedule of loans receivable as of December 31, 2019, on a recency basis:
| No. Loans | Unpaid Balances | % | ||||||||||
| Current loans (current accounts and accounts on which more than 50% of an original contract payment was made in the last 59 days) | 246 | $ | 56,113 | 97 | % | |||||||
| 60-89 days | - | - | - | % | ||||||||
| 90-179 days | 4 | 1,495 | 3 | % | ||||||||
| 180-269 days | - | - | - | % | ||||||||
| Subtotal | 250 | $ | 57,608 | 100 | % | |||||||
| Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | - | $ | - | - | % | |||||||
| Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.) | - | $ | - | - | % | |||||||
| Total | 250 | $ | 57,608 | 100 | % | |||||||
| 27 |
Below is an aging schedule of loans receivable as of December 31, 2018, on a recency basis:
| No. Loans | Unpaid Balances | % | ||||||||||
| Current loans (current accounts and accounts on which more than 50% of an original contract payment was made in the last 59 days) | 265 | $ | 48,144 | 98 | % | |||||||
| 60-89 days | – | – | – | % | ||||||||
| 90-179 days | 1 | 299 | 1 | % | ||||||||
| 180-269 days | 2 | 684 | 1 | % | ||||||||
| Subtotal | 268 | $ | 49,127 | 100 | % | |||||||
| Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | – | % | |||||||
| Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.) | – | $ | – | – | % | |||||||
| Total | 268 | $ | 49,127 | 100 | % | |||||||
Below is an aging schedule of loans receivable as of December 31, 2018,2019, on a contractual basis:
| No. Loans | Unpaid Balances | % | ||||||||||
| Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date. | 265 | $ | 48,144 | 98 | % | |||||||
| 60-89 days | – | – | – | % | ||||||||
| 90-179 days | 1 | 299 | 1 | % | ||||||||
| 180-269 days | 2 | 684 | 1 | % | ||||||||
| Subtotal | 268 | $ | 49,127 | 100 | % | |||||||
| Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | – | % | |||||||
| Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.) | – | $ | – | – | % | |||||||
| Total | 268 | $ | 49,127 | 100 | % | |||||||
| No. Loans | Unpaid Balances | % | ||||||||||
| Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date. | 246 | $ | 56,113 | 97 | % | |||||||
| 60-89 days | - | - | - | % | ||||||||
| 90-179 days | 4 | 1,495 | 3 | % | ||||||||
| 180-269 days | - | - | - | % | ||||||||
| Subtotal | 250 | $ | 57,608 | 100 | % | |||||||
| Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | - | $ | - | - | % | |||||||
| Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.) | - | $ | - | - | % | |||||||
| Total | 250 | $ | 57,608 | 100 | % | |||||||
Foreclosed Assets
Below is a roll forward of foreclosed assets:
Three Months Ended March 31, 2019 | Year Ended December 31, 2018 | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2020 | Year Ended December 31, 2019 | Three Months Ended March 31, 2019 | |||||||||||||||||||
| Beginning balance | $ | 5,973 | $ | 1,036 | $ | 1,036 | $ | 4,916 | $ | 5,973 | $ | 5,973 | ||||||||||||
| Additions from loans | - | 4,738 | - | - | 3,352 | - | ||||||||||||||||||
| Additions for construction/development | 176 | 1,608 | 48 | 444 | 763 | 176 | ||||||||||||||||||
| Sale proceeds | - | (809 | ) | - | (185 | ) | (4,543 | ) | - | |||||||||||||||
| Gain on sale | - | - | - | |||||||||||||||||||||
| Loss on sale | - | (103 | ) | - | (35 | ) | (274 | ) | - | |||||||||||||||
| Gain on foreclosure | - | 19 | - | - | 203 | - | ||||||||||||||||||
| Loss on foreclosure | - | (47 | ) | - | ||||||||||||||||||||
| Impairment loss on foreclosed assets | (80 | ) | (468 | ) | (5 | ) | (109 | ) | (558 | ) | (80 | ) | ||||||||||||
| Ending balance | $ | 6,069 | $ | 5,973 | $ | 1,079 | $ | 5,031 | $ | 4,916 | $ | 6,069 | ||||||||||||
During the three monthsquarter ended March 31, 2019,2020, we finishedimpaired eight of our largest32 foreclosed asset,assets which related to assets received into foreclosure due to the death of a propertyborrower in Sarasota, Florida,2018. In addition, we sold one of our foreclosed assets for proceeds of $185 and listed it for sale. That property had an $80 impairment in the quarter. We also added $176 total for the construction/developmenta loss of three properties: the Sarasota property and two homes we are building Georgia.$35.
| 28 |
Customer Interest Escrow
Below is a roll forward of interest escrow:
Three Months Ended 2019 | Year Ended 2018 | Three Months Ended 2018 | Three Months Ended March 31, 2020 | Year Ended December 31, 2019 | Three Months Ended March 31, 2019 | |||||||||||||||||||
| Beginning balance | $ | 939 | $ | 935 | $ | 935 | $ | 643 | $ | 939 | $ | 939 | ||||||||||||
| Preferred equity dividends | 33 | 125 | 30 | 37 | 136 | 33 | ||||||||||||||||||
| Additions from Pennsylvania loans | 715 | 362 | - | 500 | 1,107 | 715 | ||||||||||||||||||
| Additions from other loans | 108 | 1,214 | 102 | 51 | 768 | 108 | ||||||||||||||||||
| Interest, fees, principal or repaid to borrower | (506 | ) | (1,697 | ) | (281 | ) | (550 | ) | (2,307 | ) | (506 | ) | ||||||||||||
| Ending balance | $ | 1,289 | $ | 939 | $ | 786 | $ | 681 | $ | 643 | $ | 1,289 | ||||||||||||
Related Party Borrowings
As of March 31, 2019,2020, the Company had $1,108,$1,250, $250, and $384$386 available to borrow against the line of credit from Daniel M. Wallach (our Chief Executive Officer and chairman of the board of managers) and his wife, the line of credit from the 2007 Daniel M. Wallach Legacy Trust, and the line of credit from William Myrick (our Executive Vice President of Sales), respectively. A more detailed description is included in Note 6 to the 20182019 Financial Statements. These borrowings are in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.
Secured Borrowings
Lines of Credit
As of March 31, 20192020, the Company had borrowed $758$614 on its lines of credit from affiliates, which have a total limit of $2,500.
None of our lines of credit have given us notice of nonrenewal, and the lines will continue to automatically renew unless notice is given by a lender.
Deferred Financing Costs
The following is a roll forward of deferred financing costs:
| Three Months | Year | Three Months | ||||||||||
| Ended | Ended | Ended | ||||||||||
| March 31, 2019 | December 31, 2018 | March 31, 2018 | ||||||||||
| Deferred financing costs, beginning balance | $ | 104 | $ | – | $ | – | ||||||
| Additions | – | 104 | 5 | |||||||||
| Deferred financing costs, ending balance | $ | 104 | $ | 104 | $ | 5 | ||||||
| Less accumulated amortization | (50 | ) | (25 | ) | – | |||||||
| Deferred financing costs, net | $ | 54 | $ | 79 | $ | 5 | ||||||
Summary
The borrowings secured by loan assets are summarized below:
| March 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||
| Due from | Due from | |||||||||||||||||||||||||||||||
Book Value of Loans which | Shepherd’s Finance to Loan | Book Value of Loans which | Shepherd’s Finance to Loan | March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||
| Served as Collateral | Purchaser or Lender | Served as Collateral | Purchaser or Lender | Book Value of Loans which Served as Collateral | Due from Shepherd’s Finance to Loan Purchaser or Lender | Book Value of Loans which Served as Collateral | Due from Shepherd’s Finance to Loan Purchaser or Lender | |||||||||||||||||||||||||
| Loan Purchaser | ||||||||||||||||||||||||||||||||
| Builder Finance, Inc. | $ | 9,578 | $ | 6,254 | $ | 8,742 | $ | 5,294 | ||||||||||||||||||||||||
| S.K. Funding, LLC | 12,693 | 6,907 | 11,788 | 6,408 | ||||||||||||||||||||||||||||
| Builder Finance | $ | 12,593 | $ | 8,428 | $ | 13,711 | $ | 9,375 | ||||||||||||||||||||||||
| S.K. Funding | 10,004 | 6,771 | 10,394 | 6,771 | ||||||||||||||||||||||||||||
| Lender | ||||||||||||||||||||||||||||||||
| Stephen K. Shuman | 1,855 | 1,325 | 2,051 | 1,325 | ||||||||||||||||||||||||||||
| Shuman | 1,798 | 1,325 | 1,785 | 1,325 | ||||||||||||||||||||||||||||
| Jeff Eppinger | 1,941 | 1,000 | 1,821 | 1,000 | ||||||||||||||||||||||||||||
| Hardy Enterprises, Inc. | 1,852 | 1,000 | 1,684 | 1,000 | ||||||||||||||||||||||||||||
| Gary Zentner | 611 | 250 | 472 | 250 | ||||||||||||||||||||||||||||
| R. Scott Summers | 1,210 | 847 | 841 | 628 | ||||||||||||||||||||||||||||
| Paul Swanson | 9,476 | 7,000 | 8,079 | 5,986 | 6,105 | 5,193 | 8,377 | 5,824 | ||||||||||||||||||||||||
| Total | $ | 33,602 | $ | 21,486 | $ | 30,660 | $ | 19,013 | $ | 36,114 | $ | 24,814 | $ | 39,085 | $ | 26,173 | ||||||||||||||||
| 29 |
| Year | Typical Current Advance Rate | Does Buyer Portion | ||||||||||||
| Initiated | On New Loans | Have Priority? | Rate | |||||||||||
| Loan Purchaser | ||||||||||||||
| Builder Finance, Inc. | 2014 | 75 | % | Yes | The rate our customer pays us | |||||||||
| S.K. Funding, LLC | 2015 | 55 | % | Varies | 9-10.5 | % | ||||||||
| Lender | ||||||||||||||
| Stephen K. Shuman | 2017 | 67 | % | Yes | 10 | % | ||||||||
| Paul Swanson | 2017 | 67 | % | Yes | 10 | % | ||||||||
Unsecured Borrowings
Unsecured Notes through the Public Offering (“Notes Program”)
On March 22, 2019, the Company terminated its second public offering and commenced its third public third public offering of fixed rate subordinated notes (the “Notes”). The effective interest rate on borrowings through our Notes Program at March 31, 20192020 and December 31, 20182019 was 10.09%10.68% and 10.07%10.56%, respectively, not including the amortization of deferred financing costs. There are limited rights of early redemption. We generally offer four durations at any given time, ranging from 12 to 48 months from the date of issuance. There are limited rights of early redemption. Our 36-month Note has a mandatory early redemption option, subject to certain conditions. The following table shows the roll forward of our Notes Program:
| Three Months Ended March 31, 2019 | Year Ended December 31, 2018 | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2020 | Year Ended December 31, 2019 | Three Months Ended March 31, 2019 | |||||||||||||||||||
| Gross Notes outstanding, beginning of period | $ | 17,348 | $ | 14,121 | $ | 14,121 | $ | 20,308 | $ | 17,348 | $ | 17,348 | ||||||||||||
| Notes issued | 3,532 | 9,645 | 1,309 | 4,722 | 11,127 | 3,532 | ||||||||||||||||||
| Note repayments / redemptions | (2,049 | ) | (6,418 | ) | (1,645 | ) | (3,960 | ) | (8,167 | ) | (2,049 | ) | ||||||||||||
| Gross Notes outstanding, end of period | $ | 18,831 | $ | 17,348 | $ | 13,785 | $ | 21,070 | $ | 20,308 | $ | 18,831 | ||||||||||||
| Less deferred financing costs, net | 454 | 212 | 267 | 453 | 416 | 454 | ||||||||||||||||||
| Notes outstanding, net | $ | 18,377 | $ | 17,136 | $ | 13,518 | $ | 20,617 | $ | 19,892 | $ | 18,377 | ||||||||||||
The following is a roll forward of deferred financing costs:
| Three Months | Year | Three Months | ||||||||||||||||||||||
| Ended | Ended | Ended | ||||||||||||||||||||||
| March 31, 2019 | December 31, 2018 | March 31, 2018 | Three Months Ended March 31, 2020 |
Year Ended December 31, 2019 | Three Months Ended March 31, 2019 | |||||||||||||||||||
| Deferred financing costs, beginning balance | $ | 1,212 | $ | 1,102 | $ | 1,102 | $ | 786 | $ | 1,212 | $ | 1,212 | ||||||||||||
| Additions | $ | 282 | $ | 117 | $ | 29 | 77 | 365 | 282 | |||||||||||||||
| Disposals | – | (7 | ) | – | - | (791 | ) | – | ||||||||||||||||
| Deferred financing costs, ending balance | $ | 1,494 | $ | 1,212 | $ | 1,131 | 863 | 786 | 1,494 | |||||||||||||||
| Less accumulated amortization | (1,040 | ) | (1,000 | ) | (864 | ) | (410 | ) | (370 | ) | (1,040 | ) | ||||||||||||
| Deferred financing costs, net | $ | 454 | $ | 212 | $ | 267 | $ | 453 | $ | 416 | $ | 454 | ||||||||||||
The following is a roll forward of the accumulated amortization of deferred financing costs:
| Three Months | Year | Three Months | ||||||||||||||||||||||
| Ended | Ended | Ended | Three Months | Year | Three Months | |||||||||||||||||||
| March 31, 2019 | December 31, 2018 | March 31, 2018 | Ended March 31, 2020 | Ended December 31, 2019 | Ended March 31, 2019 | |||||||||||||||||||
| Accumulated amortization, beginning balance | $ | 1,000 | $ | 816 | $ | 816 | $ | 370 | $ | 1,000 | $ | 1,000 | ||||||||||||
| Additions | 40 | 184 | 48 | 40 | 161 | 40 | ||||||||||||||||||
| Disposals | - | (791 | ) | - | ||||||||||||||||||||
| Accumulated amortization, ending balance | $ | 1,040 | $ | 1,000 | $ | 864 | $ | 410 | $ | 370 | $ | 1,040 | ||||||||||||
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Other Unsecured Debts
Our other unsecured debts are detailed below:
| Maturity | Interest | Principal Amount Outstanding as of | Principal Amount Outstanding as of | |||||||||||||||||||||||||
| Loan | Date | Rate(1) | March 31, 2019 | December 31, 2018 | Maturity Date | Interest Rate(1) | March 31, 2020 | December 31, 2019 | ||||||||||||||||||||
| Unsecured Note with Seven Kings Holdings, Inc. | Demand(2) | 9.5 | % | $ | 500 | $ | 500 | Demand(2) | 9.5 | % | $ | 500 | $ | 500 | ||||||||||||||
| Unsecured Line of Credit from Builder Finance, Inc. | January 2020 | 10.0 | % | 500 | 500 | March 2021 | 10.0 | % | 500 | - | ||||||||||||||||||
| Unsecured Line of Credit from Paul Swanson | March 2019 | 10.0 | % | - | 1,014 | June 2020(6) | 10.0 | % | 1,807 | 1,176 | ||||||||||||||||||
| Subordinated Promissory Note | September 2019 | 9.5 | % | 1,125 | 1,125 | September 2020 | 9.5 | % | 563 | 563 | ||||||||||||||||||
| Subordinated Promissory Note | December 2019 | 10.5 | % | 113 | 113 | December 2021 | 10.5 | % | 146 | 146 | ||||||||||||||||||
| Subordinated Promissory Note | April 2020 | 10.0 | % | 100 | 100 | April 2020 | 10.0 | % | 100 | 100 | ||||||||||||||||||
| Subordinated Promissory Notes | October 2019 | 10.0 | % | 150 | 150 | |||||||||||||||||||||||
| Subordinated Promissory Note | April 2021 | 10.0 | % | 174 | 174 | |||||||||||||||||||||||
| Subordinated Promissory Note | August 2022 | 11.0 | % | 200 | 200 | |||||||||||||||||||||||
| Subordinated Promissory Note | March 2023 | 11.0 | % | 169 | 169 | |||||||||||||||||||||||
| Subordinated Promissory Note | April 2020 | 6.5 | % | 500 | 500 | |||||||||||||||||||||||
| Subordinated Promissory Note | February 2021 | 11.0 | % | 600 | 600 | |||||||||||||||||||||||
| Subordinated Promissory Note | Demand | 5.0 | % | 500 | 500 | |||||||||||||||||||||||
| Subordinated Promissory Note | Demand | 5.0 | % | 3 | 3 | |||||||||||||||||||||||
| Subordinated Promissory Note | August 2022 | 11.0 | % | 200 | - | December 2023 | 11 | % | 20 | - | ||||||||||||||||||
| Subordinated Promissory Note | September 2020(6) | 11.0 | % | 169 | - | February 2024 | 11 | % | 20 | - | ||||||||||||||||||
| Senior Subordinated Promissory Note | March 2022(3) | 10.0 | % | 400 | 400 | March 2022(3) | 10.0 | % | 400 | 400 | ||||||||||||||||||
| Senior Subordinated Promissory Note | March 2022(4) | 1.0 | % | 728 | 728 | March 2022(4) | 1.0 | % | 728 | 728 | ||||||||||||||||||
| Junior Subordinated Promissory Note | March 2022(4) | 22.5 | % | 417 | 417 | March 2022(4) | 22.5 | % | 417 | 417 | ||||||||||||||||||
| Senior Subordinated Promissory Note | October 2020(5) | 1.0 | % | 279 | 279 | October 2020(5) | 1.0 | % | 279 | 279 | ||||||||||||||||||
| Junior Subordinated Promissory Note | October 2020(5) | 20.0 | % | 173 | 173 | October 2020(5) | 20.0 | % | 173 | 173 | ||||||||||||||||||
| $ | 4,854 | $ | 5,499 | $ | 7,799 | $ | 6,628 | |||||||||||||||||||||
(1)Interest rate per annum, based upon actual days outstanding and a 365/366-day year.
| (1) | Interest rate per annum, based upon actual days outstanding and a 365/366-day year. |
| (2) | Due six months after lender gives notice. |
| (3) | Lender may require us to repay $20 of principal and all unpaid interest with 10 days’ notice. |
| (4) | These notes were issued to the same holder and, when calculated together, yield a blended return of 11% per annum. |
| (5) | These notes were issued to the same holder and, when calculated together, yield a blended return of 10% per annum. |
| (6) | Amount due in June 2020 is $1,000 with the remainder due November 2020. |
(2)Due six months after lender gives notice.
(3)Lender may require us to repay $20 of principal and all unpaid interest with 10 days’ notice.
(4)These notes were issued to the same holder and, when calculated together, yield a blended return of 11% per annum.
(5)These notes were issued to the same holder and, when calculated together, yield a blended return of 10% per annum.
(6)Due one month after lender gives notice, which notice may not be given prior to August 1, 2020.
Redeemable Preferred Equity and Members’ Capital
We strive to maintain a reasonable (about 15%) balance between (1) redeemable preferred equity plus members’ capital and (2) total assets. The ratio of redeemable preferred equity plus members’ capital to loan assets was 11%13% as of March 31, 20192020 and 12% as of December 31, 2018.2019. We anticipate this ratio further decreasingto decrease until more preferred equity is added. We are currently exploring potential increases in preferred equity.
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Priority of Borrowings
The following table displays our borrowings and a ranking of priority. The lower the number, the higher the priority.
| Priority Rank | March 31, 2019 | December 31, 2018 | Priority Rank | March 31, 2020 | December 31, 2019 | |||||||||||||||||
| Borrowing Source | ||||||||||||||||||||||
| Purchase and sale agreements and other secured borrowings | 1 | $ | 25,382 | $ | 22,521 | 1 | $ | 25,445 | $ | 26,806 | ||||||||||||
| Secured lines of credit from affiliates | 2 | 758 | 816 | |||||||||||||||||||
| Secured line of credit from affiliates | 2 | 614 | 189 | |||||||||||||||||||
| Unsecured line of credit (senior) | 3 | 500 | 500 | 3 | 500 | 500 | ||||||||||||||||
| Other unsecured debt (senior subordinated) | 4 | 1,008 | 1,008 | 4 | 1,407 | 1,407 | ||||||||||||||||
| Unsecured Notes through our public offering, gross | 5 | 18,831 | 17,348 | 5 | 21,070 | 20,308 | ||||||||||||||||
| Other unsecured debt (subordinated) | 5 | 2,756 | 3,401 | 5 | 5,302 | 4,131 | ||||||||||||||||
| Other unsecured debt (junior subordinated) | 6 | 590 | 590 | 6 | 590 | 590 | ||||||||||||||||
| Total | $ | 49,825 | $ | 46,184 | $ | 54,928 | $ | 53,931 | ||||||||||||||
Liquidity and Capital Resources
Our primary liquidity management objective is to meet expected cash flow needs while continuing to service our business and customers. AsCombined loans outstanding as of March 31, 20192020 and December 31, 2018, we had 2962019 was 227 and 268, respectively, in combined250, respectively. Gross loans outstanding, whichreceivable totaled $52,931$56,077 and $49,127, respectively, in gross loan receivables outstanding. Unfunded$57,608, respectively. Our unfunded commitments to extend credit, which have similar collateral, credit and market risk to our outstanding loans, were $30,422$15,259 and $25,258$16,662 as March 31, 20192020 and December 31, 2018,2019, respectively.
We anticipate a significantan increase in our gross loan receivables over the 12 months subsequent to March 31, 20192020 by directly increasing originations by funding new loans to newborrowers in stronger markets for the purpose of developing presold homes, which loans have reduced loan-to-value ratios. During the second and existing customers.third quarter of 2020, we expect that loan originations will decrease compared to the same period of 2019 due to risk mitigation in response to COVID-19. In addition, competition has declined; therefore, we believe the ability to return to historical levels may be achieved through 2021.
To fund our combined loans, we rely on secured debt, unsecured debt, and equity, which are described in the following table:
| Source of Liquidity | As of March 31, 2019 | As of December 31, 2018 | As of March 31, 2020 | As of December 31, 2019 | ||||||||||||
| Secured debt | $ | 26,085 | $ | 23,258 | $ | 26,054 | $ | 26,991 | ||||||||
| Unsecured debt | 23,231 | 22,635 | 28,416 | 26,520 | ||||||||||||
| Equity | 6,461 | 6,082 | 6,963 | 7,147 | ||||||||||||
Secured debt, net of deferred financing costs increased $2,827decreased $937 during the three months ended March 31, 2019,2020, which consisted of an increasea decrease in borrowings secured by loans and foreclosed assets of $2,886$1,362 offset by a decreasean increase in affiliate lines of $59.$425. We anticipate increasing our secured debt by roughly half of the increase in loan asset balances over the 12 months subsequent to March 31, 20192020 through our existing loan purchase and sale agreements and additional lines of credit.
We anticipate that the other half of the loan asset growth will come from a combination of increases in our unsecured debt and equity. Unsecured debt, net of deferred financing costs increased $596$1,896 during the three months ended March 31, 2019, unsecured debt, net of deferred financing costs changed2020 due primarily to an increaseincreased participation in our Notes program of $1,241, which was offset by a decrease in$725 and other unsecured debtdebts of $645. The change in other unsecured debt was due to the elimination of the of unsecured portion of the line of credit from Paul Swanson of $1,014, which was off set by two new promissory notes of $369.$1,171. We anticipate an increase in our unsecured debt through increased sales in the Notes Program to cover most of the increase in loan assets not covered by increases in our secured debt during the 12 months subsequent to March 31, 2019.2020.
In addition, in May 2020, we borrowed approximately $362 pursuant to the Paycheck Protection Program (“PPP”), created under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The PPP is intended to provide loans to qualified businesses to cover payroll and certain other identified costs. Funds from the loan may only be used for certain purposes, including payroll, benefits, rent, and utilities. All or a portion of the loan may be forgivable, as provided by the terms of the PPP.
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Equity increased $379decreased $184 during the three months ended March 31, 2019,2020 due primarily to distributions of Class A common equity of $217 which consistedwas offset by earned but not paid distributions of an increase in Series C cumulative preferred units (“Series C Preferred Units”), Series B cumulative preferred units, and Class A common equity of $72, $60, and $247, respectively.$89. We anticipate an increase in our equity during the 12 months subsequent to March 31, 2019,2020, through the issuance of additional Series C Preferred Units. During the year ended December 31, 2018, we increased the amount of Series C Preferred Units outstanding by $1,288. If we are not able to increase our equity through the issuance of additional Series C Preferred Units, we will rely more heavily on raising additional funds through the Notes Program. If we anticipate the ability to not fund our projected increases in loan balances as discussed above, we may reduce new loan originations to reduce need for additional funds.
Contractual Obligations
The following table shows the maturity of outstanding debt as of March 31, 2019:2020:
| Year Maturing | Total Amount Maturing | Public Offering | Other Unsecured | Secured Borrowings | Total Amount Maturing | Public Offering | Other Unsecured | Secured Borrowings | ||||||||||||||||||||||||
| 2019 | $ | 32,914 | $ | 5,521 | $ | 1,887 | $ | 25,506 | ||||||||||||||||||||||||
| 2020 | 5,073 | 4,006 | 1,052 | 15 | $ | 31,813 | $ | 1,949 | $ | 4,424 | $ | 25,439 | ||||||||||||||||||||
| 2021 | 7,202 | 7,187 | - | 15 | 13,006 | 11,570 | 1,420 | 16 | ||||||||||||||||||||||||
| 2022 | 3,841 | 2,079 | 1,746 | 16 | 5,225 | 3,463 | 1,746 | 16 | ||||||||||||||||||||||||
| 2023 and thereafter | 795 | 38 | 169 | 588 | ||||||||||||||||||||||||||||
| 2023 | 1,027 | 821 | 189 | 17 | ||||||||||||||||||||||||||||
| 2024 and thereafter | 3,857 | 3,267 | 20 | 571 | ||||||||||||||||||||||||||||
| Total | $ | 49,825 | $ | 18,831 | $ | 4,854 | $ | 26,140 | $ | 54,928 | $ | 21,070 | $ | 7,799 | $ | 26,059 | ||||||||||||||||
The total amount maturing through year ending December 31, 20192020 is $32,914,$31,813, which consists of secured borrowings of $25,506$25,439 and unsecured borrowings of $7,408.$6,373.
Secured borrowings maturing through year ending December 31, 20192020 significantly consists of loan purchase and sale agreements with two loan purchasers (Builder Finance, Inc. and S. K. Funding, LLC) and two lenders (Stephen K. Shuman and Paul Swanson).six lenders. Our secured borrowings are mostly showingclassified as maturing during 2020 due by 2019 becauseprimarily to the related collateral is demand loans. The following lists our secured facilities with maturity and renewal dates:
| ● | Swanson – | |
| ● | Shuman – $1,325 due July | |
| ● | S. K. Funding, LLC – $3,500 of the total due July | |
| ● | S. K. Funding, LLC – | |
| ● | BuilderFinance, Inc. – | |
| ● | New LOC Agreements – $3,096 generally one-month notice and six months to reduce principal balance to zero; | |
| ● | William Myrick | |
| ● | Mortgage payable – |
Unsecured borrowings due onby December 31, 20192020 consist of Notes issued pursuant to the Notes Program and other unsecured debt of $5,521$1,949 and $1,887,$4,424, respectively. To the extent that Notes issued pursuant to the Notes Program are not reinvested upon maturity, we will be required to fund the maturities, which we anticipate funding through the issuance of new Notes in our Notes Program. Historically, approximately 82%81% of our Note holders reinvest upon maturity. Our other unsecured debt has historically renewed. For more information on other unsecured borrowings, see Note 5 – Borrowings. If other unsecured borrowings are not renewed in the future, we anticipate funding such maturities through investments in our Notes Program.
Summary
We have the funding available to address the loans we have today, including our unfunded commitments. We anticipate growing our assets through the net sources and uses (12-month liquidity) listed above as well as future capital increases from debt, redeemable preferred equity, and regular equity. Our expectation to grow loan asset balances is subject to changes due to changes in demand, competition, and COVID-19. Although our secured debt is almost entirely listed as currently due because of the underlying collateral being demand notes, the vast majority of our secured debt is either contractually set to automatically renew unless notice is given or, in the case of purchase and sale agreements, has no end date as to when the purchasers will not purchase new loans (although they are never required to purchase additional loans).
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Inflation, Interest Rates, and Housing Starts
Since we are in the housing industry, we are affected by factors that impact that industry. Housing starts impact our customers’ ability to sell their homes. Faster sales generally mean higher effective interest rates for us, as the recognition of fees we charge is spread over a shorter period. Slower sales generally mean lower effective interest rates for us. Slower sales also are likely to increase the default rate we experience.
Housing inflation generally has a positive impact on our operations. When we lend initially, we are lending a percentage of a home’s expected value, based on historical sales. If those estimates prove to be low (in an inflationary market), the percentage we loaned of the value actually decreases, reducing potential losses on defaulted loans. The opposite is true in a deflationary housing price market. It is our opinion that values are average in many of the housing markets in the U.S. today, and our lending against these values is safer than loans made by financial institutions in 2006 to 2008. Our analysis of the COVID-19 impact on housing in the markets in which we do business is mixed. In many markets, our customers see demand as outpacing new housing starts. In some markets, few houses are selling due to governmental restrictions on Realtors. In Orlando, Florida, we anticipate some significant lack of demand for customers who sell more affordable homes, which is likely to lead to reductions in selling prices. We note that nationwide, fewer first-time home buyers will qualify for government backed loans due to FICO score and other criteria changes.
Interest rates have several impacts on our business. First, rates affect housing (starts, home size, etc.). High long termlong-term interest rates may decrease housing starts, having the effects listed above. Higher interest rates will also affect our investors. We believe that there will be a spread between the rate our Notes yield to our investors and the rates the same investors could get on deposits at FDIC insured institutions. We also believe that the spread may need to widen if these rates rise. For instance, if we pay 7% above average CD rates when CDs are paying 0.5%, when CDs are paying 3%, we may have to have a larger than 7% difference. This may cause our lending rates, which are based on our cost of funds, to be uncompetitive. High interest rates may also increase builder defaults, as interest payments may become a higher portion of operating costs for the builder. Higher short termshort-term rates may increase the rates builders are charged by banks faster than our rates to the builder will grow, which might be a benefit for us. Below is a chart showing three yearthree-year U.S. treasury rates, which are being used by us here to approximate CD rates. Short term interestThe rates have risen slightly butwe are generally low historically.paying our investors are going down due to COVID-19 and our recent offering which includes shorter redemption options with lower returns., because other alternative investments are paying lower rates. This in turn will lower the rates to our borrowers over time. We also anticipate some lower cost secured funding in the second quarter of 2020 which will also lower both our cost of funds and the rate we charge our customers.
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Housing prices are also generally correlated with housing starts, so that increases in housing starts usually coincide with increases in housing values, and the reverse is generally true. Below is a graph showing single family housing starts from 2000 through today.
Source: U.S. Census Bureau
To date, changes in housing starts, CD rates, and inflation have not had a material impact on our business.
Off-Balance Sheet Arrangements
As of March 31, 20192020, and December 31, 2018,2019, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management including our Chief Executive Officer (our principal executive officer) and Acting Chief Financial Officer (our principal financial officer) evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our CEO (our principal executive officer) and Acting CFO (our principal financial officer) concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our CEO (our principal executive officer) and Acting CFO (our principal financial officer), as appropriate to allow timely decisions regarding required disclosure.
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Internal Control over Financial Reporting
There has been no change in our internal controls over financial reporting during the quarter ended March 31, 20192020 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
None.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| (a) | Reinvestments in Partial Series C Cumulative Preferred Units
Investors in the Series C cumulative preferred units (“Series C Preferred Units”) may elect to reinvest their distributions in additional Series C Preferred Units (the “Series C Reinvestment Program”). Pursuant to the Series C Reinvestment Program, we issued the following Series C Preferred Units on March 31, |
| Owner | Units | Amount | Units | Amount | ||||||||||||
| Daniel M. and Joyce S. Wallach | 0.3821598 | $ | 38,215.98 | 0.4306273 | $ | 43,062.73 | ||||||||||
| Gregory L. Sheldon | 0.0630627 | 6,306.27 | ||||||||||||||
| Gregory L. Sheldon and Madeline M. Sheldon | 0.1021601 | 10,216.01 | ||||||||||||||
| BLDR, LLC | 0.1236402 | 12,364.02 | 0.1393209 | 13,932.09 | ||||||||||||
| Schultz Family Living Trust | 0.0307570 | 3,075.70 | 0.0346578 | 3,465.78 | ||||||||||||
| Jeffrey L. Eppinger | 0.1230281 | 12,302.81 | 0.1212040 | 12,120.40 | ||||||||||||
| Fernando Ascencio and Lorraine Carol Ascencio | 0.0648449 | 6,484.49 | ||||||||||||||
| Total | 0.8928150 | $ | 89,281.50 | |||||||||||||
| The proceeds received from the sales of the partial Series C Preferred Units in these transactions were used for the funding of construction loans. The transactions in Series C Preferred Units described above were effected in private transactions exempt from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities Act. The transactions described above did not involve any public offering, were made without general solicitation or advertising, and the buyer represented to us that he/she/it is an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, with access to all relevant information necessary to evaluate the investment in the Series C Preferred Units. | ||
|
We previously entered into an agreement with the Hoskins Group (consisting of Benjamin Marcus Homes, LLC, Investor’s Mark Acquisitions, LLC, and Mark L. Hoskins) pursuant to which we sell the Hoskins Group 0.1 Series B cumulative preferred units (“Series B Preferred Units”) upon the closing of certain lots. We issued 0.5 Series B Preferred Units to the Hoskins Group on January 30, 2019 for $50,000, and 0.1 Series B Preferred Units to the Hoskins Group on January 31, 2019 for $10,000.
The proceeds received from the sales of the Series B Preferred Units in those transactions were used for the funding of construction loans. The transactions in Series B Preferred Units described above were effected in private transactions exempt from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities Act. The transactions described above did not involve any public offering, were made without general solicitation or advertising, and the buyers represented to us that they are an “accredited investor’’ within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, with access to all relevant information necessary to evaluate the investment in the Series B Preferred Units.
| (b) | We registered up to $70,000,000 in Fixed Rate Subordinated Notes (“Notes”) in our current public offering, which is our third public offering of Notes (SEC File No. 333-224557, effective March 22, 2019). As of March 31, | |
| (c) | None. |
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
| (a) | During the quarter ended March 31, On May 5, 2020, we entered into an agreement to borrow approximately $362,000 from LCA Bank Corporation pursuant to the Paycheck Protection Program (“PPP”), created under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The PPP is intended to provide loans to qualified businesses to cover payroll and certain other identified costs. The loan has an interest rate of 1.0% and a term of 24 months. No payments are due for the first 6 months, although interest accrues, and monthly payments, which include interest, are due over the next 18 months to pay off the loan. Funds from the loan may only be used for certain purposes, including payroll, benefits, rent, and utilities. All or a portion of the loan may be forgivable, as provided by the terms of the PPP. The loan is evidenced by a promissory note, which contains customary events of default relating to, among other things, payment defaults and breaches of representations. We may prepay the loan at any time prior to maturity with no prepayment penalties. The foregoing description of the loan obtained pursuant to the PPP does not purport to be complete and is qualified in its entirety by reference to the full text of the Loan Agreement and the Note attached to this Quarterly Report on Form 10-Q as Exhibit 10.1 and 10.2, respectively, and incorporated herein by reference. | |
| (b) | During the quarter ended March 31, |
The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.
EXHIBIT INDEX
The following exhibits are included in this report on Form 10-Q for the period ended March 31, 20192020 (and are numbered in accordance with Item 601 of Regulation S-K).
* Filed herewith.
** Pursuant to Regulation 406T of Regulation S-T, these Interactive Data Files are deemed not filed or part of a registration statement or prospectus for purpose of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SHEPHERD’S FINANCE, LLC (Registrant) | ||
| Dated: May | By: | /s/ Catherine Loftin |
| Catherine Loftin | ||
| Acting Chief Financial Officer | ||
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